On Tuesday, I shared about how setting up a budgeting system is the only way to go when it comes to feeling free and confident with your spending (check out that post here). Today’s post will look at how to get a budgeting system set up, step by step.
Setting up a budgeting system doesn’t have to be difficult. The important thing about budgeting is to find a system that works for you with your needs in this phase of your life. The budgeting system that will work is the one that you’ll actually use.
My husband and I have tried many methods over the years with varying levels of success. We tried the cash envelope system. That didn’t work too well because we like the convenience of using our debit card or buying things online, and it can be difficult with the envelope system. We also didn’t need that level of precision in our budgeting. We tried a partial envelope system, where we used the system for some things but not others. We tried Mint.com, which keeps track of your spending through your bank accounts electronically, but we prefer being able to categorize our spending according to our own categories, which was possible but tedious on that system. We tried using Google Keep to track expenses from a budgeted amount down to zero, but we weren’t diligent enough to keep up with it. I think each of these systems would work really well for someone, but they just didn’t work well for us.
After trial and error, we arrived at a system that works for us. Neither of us are big spenders in general and we are pretty good at keeping an eye on our account balance online, so if that describes you, here is a method that can help you keep track of things while maintaining freedom and flexibility.
- Prepare. If you’re in a relationship where money is shared, sit down with your significant other at a time that each of you can give your undivided attention. If your money is yours and yours alone, find a time that you feel focused. Gather some simple materials: a notebook, pen, calculator, or open up a spreadsheet if you prefer the digital route (we’ve tried it and prefer pen and paper). If you don’t have online banking, gather your bank statements, pay stubs, any bills, and any other information that pertains to your income or expenses. If you do have online banking, have your account info opened so you can refer to it easily.
- Set goals. This doesn’t have to happen every month, but having some sort of money goal in mind is motivating and helpful when we get to step 4. Some ideas may be to reach a certain amount in savings, pay off debt, or give a certain amount to a cause you care about.
- Calculate your income for the month. Add together any forms of income you will receive for the whole month (wages, tips, freelance gigs, any financial assistance, etc.). Don’t count income that you are unsure of (better safe than sorry!)
- Make a list of your monthly expenses. Think about the goals you came up with in step 2. Expenses include anything you spend money on over the course of a month. I do mean ANYTHING. No need to think of any numbers here, just items. Some examples include:
- Tithe/ donation to church or charity
- Money put in savings (emergency fund, saving for a trip or for your goals, etc)
- Insurance (vehicle, home, renter’s, health, life, etc)
- Phone bill
- Any debt payments (vehicle, student loan, personal loan, credit card, mortgage, etc)
- Grooming (things like hair appointments)
- Retirement account
- Health care (think copays, prescriptions, and things like that)
- “Fun” money (could be broken down into things like eating out, seeing movies, etc)
- Spending/ Shopping money (clothes, furniture, cosmetics, toys/ gadgets)
- Child care
- Subscriptions (Amazon Prime, Netflix, subscription boxes, magazines, etc)
- Memberships/ Dues (gym, union, club, etc)
- Any specific item for that month (a piece of furniture, a certain agreed-upon item, etc)
- Set a budget for each expense. Be realistic. If you are in the habit of getting a cup of coffee on your way to work every morning, budgeting enough “eating out” money for 1 cup per week isn’t realistic. Now’s not the time to think about huge life changes. For the first time you do this, looking back on last month’s spending and using that as a guideline is a good place to start.
- Tip: Budgets for each expense can change each month. I keep a list of all our spending categories, and we set a budget for each one each month. For example, if you know this month is your mom’s birthday, “gifts” may need a higher budget than on a month where no family members have birthdays.
- Add up your income, then add up your expenses. If your income comes out to be more than your expenses (you want a little wiggle room), you’re set! Move to step 7. If not, you need to make some changes. You can:
- Increase income. This can be difficult, but it can be done. Offer to babysit or to do some work for a neighbor. Put in overtime if you have that option. Give lessons on something you’re good at or sell something you know how to make.
- Decrease expenses. This is generally much easier for most people than to increase income. Some places to start with this may be your fun money and shopping money. If that’s still not enough, subscriptions, memberships, grooming and even groceries are a good place to try to make some cuts next. This differs with each person, but for us, we avoid cutting our charitable giving and our savings if at all possible. Make your cuts based on your priorities.
- Set up a plan to remember how much you have to spend in the necessary categories. You probably don’t need to remember how much to spend on your insurance bill, because it’s the same every month. However, if you decided to budget $100 for spending this month, you either need to remember this or write it down somewhere you’ll remember.
- Spend according to your plan. If you budgeted $100 for spending and you want to buy something that costs $50, you don’t have to fret about whether you can afford it or not because you know you can! On the other hand, if you want to buy something that costs $200, you would need to either recognize that you can’t afford it this month, or find another category that you can “borrow” money from, like the “eating out” category. If you’re in a relationship, make sure both partners agree to this. Remember that it doesn’t matter what kind of fancy budget you have if you don’t use it. If you calculated it on paper ahead of time though, and you actually follow your plan, you will have enough money for each and every budgeted category. You can take comfort in that.
- Review and update throughout the month. This is crucial. We keep our budgeted list and review it later in the month. If a bill has been paid or a category has been spent, we mark it out, so we know how much income and spending we have to work with for the rest of the month. This is so important because even the best plan won’t work if you can’t adapt to changes. Life happens, and reviewing your budget throughout the month helps you to add or subtract to deal with these changes.
- Repeat. Each month, refer to your list of income sources and expense categories and set a budget for each one. It’s useful occasionally to go through all your spending for the previous month to see how well it aligned with your plan, and then adjust accordingly in the future. This way, you can continue to be realistic in your planning of your budget.
This may look long, but really it’s a pretty quick and easy process. We can go through our expenses in less than half an hour most months, and this sets us up for financial success and peace all month long.
What do you use to keep track of your income and spending?
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